Advice on Exit opportunity

stuffonnow

My company has been offered an exit and I would really appreciate any advice folks might have
Background
At the end of 2011 I raised 400k for my start up. In on the deal was an Angel who came to work for the company full time (29% shareholding), a small investment fund (18%), EI (5% share holders) and a key staff member (5%). That leaves me with about 43%. In practice the Angel has been a full time joint manager of the company and key to it’s success to day.
The company has done well and after making an inevitable loss in 2012 we are now profitable. In 2014 we will conservatively make a profit of >0.5M, with that growing to 0.75M in 2015. I would hope that a similar growth rate could be maintained for several years after that. The nature of the business is that it would be hard for another player to wipe us out as our service is quite sticky.
We are in the utility sector and our business involves a combination of software and services. We are regulated and licenced. This means that international growth is challenging, but can be done on a country by country basis with very similar software (which we have developed ourselves) being applicable in many markets, though the regulatory work involved in each market would be very significant. Also there are large international players popping up who will be competing in these international markets. What we have is not special compared to them. Essentially we and they offer the same product/service.
Offer
So last week one of these large multinationals made us an offer to buy the company. They are interested in growing their international business and we are a good news story for them. The offer is essentially 2M upfront with a 1M 3 year earn out. Having chatted with one of them we think it would be easy to negotiate the 3years down to 2. Also I think we could get the total (2M+1M) offer up to 3.8M (this equates to 5M dollars which is a point at which they as a publically traded company need to do much more reporting and justification.
So anyway the Angel is very eager to take the deal. He will make a good return on his money and I think he has other commitments to attend to. Also he considers that taking profits out of a company is highly tax inefficient, so this pay out would work well for him.
All others would be happy with the pay out, though will go with whatever he and I agree.

Advice
Anyway… the problems that I have are purely selfish. My thoughts are:
1. When I took the risk of starting this thing I imaged a pay-out which would set me up for life. I don’t think that my pay-out (after tax just over 1M) represents that.
2. This might be my one big idea and having sold it and spent the money on a variety of normal life expenses, I would have to return to the normal 9-5 drudge. I mean it is not enough money to fund a variety of new start ups in future.
3. I’m not sure that <€4M for a company that is growing and has a profit >0.5M is a very good deal for us. I mean using a variety of metrics you could decide that it is either reasonable or terrible…
4. I’m not so panicked about the money. I like what I do and I like what where growing this company may lead me
However… if I put my foot down and insist that we do not sell, I would be stuck with an unhappy investor/partner and I’m not sure I would be happy with that either. Another option is to try and buy him out but that would mean finding someone with very deep pockets and I’m don’t have anyone in mind.

Sorry for not providing more information but you will understand that I am bound by the usual non disclosure etc.

ninty9er

Is there a sell to the multi-national and continue to manage their Irish operation option?

You know the market, they have the clout, it removes your risk. Negotiate yourself a good bonus package, your angel gets out, your employees keep their jobs and you continue doing what you enjoy, win-win.

I know that sounds all very rosy and ideal-world, but see what they have to say on it.

stuffonnow

yes I and everyone who wants to will keep their job. As for what that job will look like in future is unknown. They may move their back office here, or they may keep us as a very small office just focused in the Irish market, with no opportunity to innovate

Peterdalkey

It indeed quite a conundrum, 1m after tax is nice but not life changing money or even long term security. I would expect you have quite a decent salary at this point, too.

It is about assessing the risks versus the opportunities in coming to a decision. The big negatives of not taking the deal are
Unhappy partner and keeping the other investors/stakeholders happy.
The risks/investment/work of taking it International and beating the bigger and better resourced competition.

Your partners are clearly ready to exit, so unless you can come up with a way to take them out, you are probably best to take the dough and negotiate the best terms for yourself during the earnout.

On the upside, no business model is valid for generations, as was historically the case. In fact it seems that you now need to reinvent the model in cycles of less than 10 years.

On the face of it, your " baby" is a huge success, yet the loss of majority holding, no doubt vital to the development of the business, has not brought you to the where you wanted to be. It is a salutary lesson as to the realty of ceding majority ownership by the promoter.

stuffonnow

Ah I don't thing majority ownership is an issue. If I kick and scream I will always get my way, but I won't do it. I don't think you can really run a business where 49% (or even less) of the shares disagree with what you are doing. People need to trust each other and work to agree on where the business should go. If they disagree fundamentally, they shouldn't be in business together (I find myself answering my own question!!!)

Peterdalkey

Sorry, I should have been more clear in relation to majority, I am of the 100% ownership school of thought. I tried a partnership once very early in my career and like most of the others I have seen since, they are not for me.
The cost of this principle is usually plenty of debt but at some point you get it paid down. If it goes well, you are the winner, if it tanks, you tank too! What you do have it control over your own destiny, as long as you keep up the payments!

It is only you who can ascertain what kind of an entrepreneur you are, at the end of the day.

And Yes, You really have answered your own question! Unless you can come up with a way to take them out!

Peterdalkey

For further clarity, there is a big difference between share ownership by those critically operationally involved in the business and that of 3rd party investors. EI/VC investors can be viewed as lower risk debt, with no monthly/quarterly repayments.

stuffonnow

Agreed, thanks Peter

Trojan

Are there any other potential options available for "strategic partnership" of some kind with the multi-national that you could offer as an alternative?

Maybe negotiate a deal to keep a small percentage of the company with a yearly dividend? The others get out and you dont feel quite so much like you have sold everything too early and undercut yourself.

stuffonnow

thanks guys. As I chat to my network I have a few leads on both of these suggestions and am going to have meetings on both this week. Hard to pull off though.

Thanks

ANewStart

All I would say is fair play. A tough decision indeed.

I also think it remarkable how few comments there are on this thread. I used to think that most people on this forum were interested in exits and so a post on the topic would raise a lot of interest. Apparently this is not the case however. Lifers everywhere!!!

ssbob

If it were me then I would cash in but as another poster mentioned see if you can keep a certain percentage of the business. Think with your head rather than your heart though, because inevitably you are going to be emotionally invested in this.

I guess when you set up the company, did you say at €xxxxx I will defo cash in?

nuttlys

First off, many congrats on getting to this position. You are in the 1% who've succeeded. You've not just succeeded but you've made your business attractive enough for an exit! So really you are in the 0.1%

As far as my advice goes, if you still feel like this...

stuffonnow wrote: »

What we have is not special compared to them. Essentially we and they offer the same product/service.

.... then you should exit, not withstanding the fact the other stakeholders are ready to. Why would the other stakeholders not sell if that's the image you have of your product? You would need to be prepared to convince the rest that by not selling there is a bigger exit down the road. If your not happy with €1m, then why should they?

Negotiate the best deal for yourself and exit.

Don't forget the intangible stuff you will have on a successful exit for your next venture. Contacts & credibility.